If the production of a good creates large spillover benefits on others, the government might correct for the:
A)overallocation of resources to its production by subsidizing it.
B)overallocation of resources to its production by imposing a tax on it.
C)underallocation of resources to its production by subsidizing it.
D)underallocation of resources to its production by imposing a tax on it.

Question

If the production of a good creates large spillover benefits on others, the government might correct for the:
A)​overallocation of resources to its production by subsidizing it.
B)​overallocation of resources to its production by imposing a tax on it.
C)​underallocation of resources to its production by subsidizing it.
D)​underallocation of resources to its production by imposing a tax on it.

Quizplus · Accepted Answer

When a good creates large spillover benefits (positive externalities), it means that its production and consumption benefit others who are not directly involved in the transaction. This often leads to underallocation of resources to its production because private markets fail to account for these external benefits. To correct this market failure and encourage more production of the good, the government can subsidize it, effectively lowering its production cost and encouraging more of its production.

If the Production of a Good Creates Large Spillover Benefits